Public Sector Governance and Accountability Series: Budgeting and ...

338 Stephen B. Peterson
limited capacity, changing government, and foreign aid policies, together
with continuous political, economic, and environmental shocks.
The continuous evolution of the administrative structure has also
posed a major challenge to financial management, especially second-stage
devolution to weredas (districts) in 2001. Overnight, the number of reporting
agencies that needed to be included in the financial reform increased by
a factor of 15. During the reform, the country faced a series of serious
shocks: two droughts (including a 50-year drought that threatened 13 million
people), a 2-year war, and two elections (the fairness of the latest, in 2005,
is still being questioned).
When the reform started, an accounts backlog of six years existed. The
budget was formulated and consolidated by spreadsheet. The accounts
system was a single-entry system, and the chart of accounts was loose,
resulting in a large “other” category and misspecified expenditures. In
short, most of the public finances were run manually, and even that system
was not well managed.
The strategy of the DSA Project was to consolidate first and then reform.
That strategy was justified by the low level of skill, the evolving fiscal decentralization,
and the general degradation of the financial system that had
taken place over the previous years. At the same time, Ethiopia managed its
fiscal aggregates reasonably well, did not generally run a deficit, and maintained
an exchange rate pegged to the U.S. dollar. In other words, the DSA
strategy was to get the basics right.
The reform has for the most part been based on a (partially) sequential
platform, which is summarized in figure 10.3. The logic of this strategy is the
need to ensure that basic systems are in place before proceeding to more
complex higher-order systems. The first task was to get the transaction platform
(budgets, accounts, disbursements, and their automation) functioning
smoothly and then develop key elements of a policy and performance platform
(particularly focused on regions). In brief, the project’s strategy for
improving the transaction platform was to evolve the existing budget and
accounts procedures and to drive the automation from the procedural
requirements that were defined by the user. The approach has been very
incremental and iterative, with the government staff extensively involved.
This approach takes time but promotes an appropriate and sustainable
reform that is accessible to devolved administrative levels that have little
capacity. The platform approach of this strategy fits with the conventional
wisdom of sequencing financial reform (Schick 1966).
Several principles of sequencing the reform had been established that
had proven effective in piloting the reform. The key elements of those